AusCase Case 1 - Starbucks.pdf

8/18/2019 AusCase Case 1 - Starbucks.pdf

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Starbucks Coffee Company

Business Development

P.O. Box 3078

New York City, NY 99087-4574-00

8th April 2016

Good afternoon everyone,

Starbucks Coffee Company has come across a significant dilemma in its

business planning and future outlook, and is looking to you for professionaladvice as a newly commissioned management consultant. We require you toanalyse existing data and given resources in order to develop a business planthat is in line with Starbucks’ visions and goals in 2016.

Starbucks was established in 1971, in a small marketplace of Seattle, where itbegan its humble story of serving the world’s finest fresh-roasted whole beancoffees. The cultivation of an atmosphere of relaxation and enjoyment ,

coupled with with the delicate aroma of premium coffee, made Starbucks trulyone of a kind: a company that not only celebrated coffee’s rich tradition, butalso brought a feeling of connection with friends, family and colleagues.

With immense success in the United States, founder Howard Schultz believedthat globalization was inevitable; and sure enough, in 1996, Starbucks opened itsfirst international retail store in Tokyo. Over the next 15 years, Starbucksexpanded at a phenomenal pace — to the tune of over 20,000 stores in 65countries — and showed no signs of slowing down. Such an incredible rate ofdevelopment was unrivalled by even food industry giants such as McDonalds,KFC and Subway. This simple yet astonishing fact reveals that Starbucks is, and

will continue to be for the years to come, the world’s #1 distributor and retailerof coffee.

Today, with its largest consumer crowds in the US, China, Japan and the UK,Starbucks has finally begun operations to penetrate a long-awaited market:India. With the second-largest population in the world and a relativelyuncommercialised food/drink industry, Starbucks believes that India has the

potential to eventually become one of its main headquarters and strongholds.However, given its current circumstances, India poses various uncertainties interms of public interest, finance, media and channels of promotion. If Starbucks


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is to truly tap into the Indian market, it needs to clear any doubt pertraining tosuch issues, by establishing a creative and suitable business model.

Attached to this letter are documents detailing the globalisation of Starbucksand its visions for the future. Please read and analyse the given data carefully. In

combination with your own knowledge, reading and further research, your taskis to prepare a unique, formal business plan outlining the best course of actionStarbucks that should take over the next 2-3 years regarding the Indian market,with suitable justification and specific reference to Starbuck’s values. ONLYwritten submissions will be accepted.

Wishing you the best of luck.

Regards,

Sharron van Niekerk

Starbucks Coffee Company NZ Director and CEO


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PART A – HISTORY AND BEGINNINGS

Starbucks History

In 1987, previous Starbucks employee Howard Schultz and a group oflocal investors bought the company, including its six retail stores and coffeeroasting facility, for $3.8 million. He immediately began to open espresso bars in

cities such as Seattle, Portland and Vancouver, where a strong coffee cultureexisted. “Our strategy was to gain a foothold in each market and create astrong presence there before we moved to another city,” Schultz explained.

Starbucks’ initial philosophy was to become the “third place,” wherecustomers could go to relax, meet friends, and enjoy a special cup of coffeeoutside of their homes or work. As Starbucks expanded into new cities andregions like San Francisco and Chicago in the Midwest, it opened stores in high-visibility locations with high foot traffic, near work places, shopping areas, andmovie theatres; and it opened take-out kiosks in heavily congested areas. It also

often opened several stores in close proximity to one another, which itsexecutives felt helped build customer loyalty and deter competitors fromentering. In the early 1990s, the company began opening cafés within largebookstore and department store chains like Barnes & Noble and Nordstrom.

Starbucks did not advertise. Instead, it relied on superior customer serviceand word-of-mouth to attract customers. It encouraged its café staff to greetregulars by their first name and remember their favourite drinks; and instituted a

“just say yes” policy to any complaint, including replacing drinks or offering freedrink certificates. The company also set high standards for its store ambience,and provided convenient venues for meetings, phone calls, and work. By themid-1990s, Starbucks had a loyal customer base that included professionals,students, taxi drivers, artists, and shoppers. By the end of 1996, Starbucks was themost widely recognized brand of specialty coffee in the United States.

The notion of upholding a personalised and intimate approach in serving

coffee remains paramount today: if you ask any regular Starbucks customerhow many of its commercials they have seen in their lifetimes, the answer isalmost always “one” or “none”.


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Starbucks Coffee Company Timeline

! In 1982, Howard Schultz started to work in Starbucks as director of retailoperations and marketing. One year later, in 1983 Schulz travels to Italy.

!

In 1984, Howard convinces the founders to test the coffeehouse concept.The first Starbucks Caffe Latte is served.

!

In 1985, Schultz found the store II Giornale where he sold coffee and

espresso beverages using Starbucks coffee beans.

!

In 1987, Starbucks was sold to Howard Schultz, who had worked forStarbucks before. Schultz had been in Italy four years before and fell inlove with the uniqueness the Italian coffeehouses had: a place where

people gather for talking and sharing experiences. He wanted toreproduce that place in the United States. Schultz rebranded other storeshe had as Starbucks and started to expand rapidly, having stores in

Vancouver, British Columbia, and Chicago. The revenue for that year was

of U$ 1.3 million. Two years later he had 46 stores and roasted over2,000.000 pounds of coffee.

!

By 1991, Starbucks become the first privately owned U.S. company to offer

a stock option program that includes part-time employees.


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!

By 1992, Starbucks had 140 outlets with revenues of U$ 73.5 million and acompany value of U$ 271 million. That year Starbucks had its initial publicoffering and sold 12% of the company, facilitating the expansion of the

stores to nearly double number.

!

In 1994, Starbucks opened the first drive-thru location. Total stores 425.

!

In 1996, Starbucks began selling bottled Frapuccino and opened first storeoutside of North America in Japan. Total stores: 1,015.

! In 1999, Starbucks acquired Tazo Tea and Hear Music. Total stores: 2,498. In2001, Starbucks introduced the Starbucks card.

In 2003, Starbucks

acquired Seattle Coffee Trading Company.

In 2004, Starbucks acquired

Ethos Water. Total stores: 10,241.

! In 2008, Starbucks acquired Coffee Equipment Company and its Cloverbrewing system. Launches the first Starbucks online community and joinsTwitter and Facebook. Total stores: 16,680.

! In 2013, Starbucks opened 1,000th stores in China and Japan.

!

In 2014, Starbucks revenues have increased 11% earnings per share surge22% to a record $0.67, and it has 20,519 stores across 64 countries.Starbucks opened stores in Brunei and Colombia.


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PART B – GLOBAL EXPANSION

In 1996, Starbucks opened its first international stores in Japan, followed a

few years later by China, the U.K. and Switzerland, and other European andAsian markets where the coffee drinking culture was less entrenched. Later itmoved to mature coffee drinking markets like France and Latin America. Schultzexplained:

The decision was made to go to Asia first because we felt that thematurity of the coffee market in Europe was very strong, and was notgoing to change much over the years. The Asian market was in its

developmental stage, and we had an opportunity to position Starbucksas a leader in a new industry, and in a sense, educate a market about the

quality of coffee, the experience, and the idea of Starbucks becomingthe third place between home and work in those countries.

In most of its international markets, Starbucks worked with local businesspartners to help it set up supplier relationships, recruit talent, and understandmarket conditions. For instance, in Japan, it entered into a joint venture with

national food, apparel and lifestyle retailer Sazaby. Starbucks often ended upbuying out its local partner when a joint venture was successful and the markethad demonstrated potential for growth.

In most new countries, Starbucks tailored its offerings to local preferences.

For instance, it offered local teas in Japan and China, Turkish coffee in Turkey,and freshly squeezed orange juice in Spain. Its leading international markets,apart from Canada, were Japan, the U.K. and China (See Appendix 1) forStarbucks’ global store count.) (See Appendix 2) for Starbucks’ financial data.)(See Appendix 3) for Starbucks’ revenue breakdown.)


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local conditions. For instance, Chinese parents had significant influence overtheir children’s career decisions, and many had reservations about their children

working at a coffee bar. To counter such apprehensions, the companylaunched its first ‘family forum’ in 2012, wherein it invited the parents of its storeemployees to hear testimonies from those who had worked their way into

management positions. Later that year, it held an annual meeting of parents inBeijing and Shanghai, in which it registered 90% participation.

Starbucks China focused initially on high-visibility, high-traffic locations ininternational hubs like Beijing, Shanghai and Guangzhou, before moving into

smaller cities. By October 2012, the company had grown to over 570 stores in 48cities across the country. Starbucks expected China to become its secondlargest market by 2014, and planned to have 1,500 stores by 2015.

Starbucks in India

Starbucks had considered entering the Indian market since 2007, withreports suggesting that the company had explored partnerships with numerousIndian firms. None of the deals materialized. Schultz explained:

What a lot of people have asked is what took us so long to come to India....Without finding the right partner, getting into a complex market like

India would be very difficult. I have visited lots of coffee stores—ourcompetitors, who are doing lots of business. What encourages me is that

they are doing lots of business but there is a big, big gap. I am not tryingto be disparaging in any way. But there is a big gap between executionand what they are doing in their stores compared to what we do.

In January 2012, Starbucks and Tata Global Beverages, the world’ssecond largest branded tea company, owned by the Tata Group, one of India’smost well-known and trusted groups, announced a 50-50 joint venture, TataStarbucks, to own and operate Starbucks cafés across the country. (SeeAppendix 4) for details on Tata Group’s Hotel and retail properties in India.)

Starbucks’ association with the Tata Group dated back to 2011, when it signeda pact with Tata Coffee, a listed subsidiary of Tata Global Beverages to supply

coffee beans, the first time Starbucks decided to buy from India. The caféswould be branded “Starbucks Coffee-A Tata Alliance.” This partnership aimed

to combine Starbucks’ expertise in creating the unique Starbucks experience,product formulations and consumer insights with Tata Group’s prowess inmanaging India’s supply chain and procuring retail locations. The challenges ofopening a new retail chain in India were numerous, ranging from the difficultiesin finding great locations to building a reliable supply chain. But Bhat explained


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that Tata could help evolve solutions for many of these problems: “Tata hasbeen distinguished by its principled approach on building business foundations

and a commitment to community.”

Once the joint venture was formed, Starbucks worked with Tata Coffee to

create an espresso roast for the Indian market, and set up a roasting plant in thecountry. The company spent several months working with Taj SATS, a cateringbusiness owned by the Tata Group, to create offerings for Indian consumers,which included locally-inspired dishes like the tandoori chicken sandwich, aswell as a unique food item for each city. The plan was to deliver fresh supplies to

every store, seven days a week.

Next, it turned its attention to hiring and training talent. For its stores, itpreferred to hire a blend of talent, including some with experience from the fast

food industry as well as recent graduates from hospitality colleges who wereeager to learn. The most critical thing was to hire the right kind of people. Ketan

Raikar, director, Partner Resources, Tata Starbucks Tata explained, “If you don’thire the right talent, leadership and development will not help.” In parallel, itinvested heavily in training its partners. It sent store managers to train inSingapore, Malaysia and Thailand, and set up training centres in Mumbai, Delhiand Bengaluru, where it trained café staff to prepare its beverages. At these

trainings, a key focus area was to train partners in the art of building a personalconnection with customers. To enable new hires in India to deliver the StarbucksExperience, new Indian staff would receive roughly twice the U.S. average in

training days.

In October 2012, Starbucks opened its first store in India, an approximately4,500 square-foot retail outlet with plush wood and leather interiors, in an old

gothic building in upscale South Mumbai. Unlike other U.S. chains, such asMcDonalds, Starbucks added a distinct Indian motif to the interiors by engaginglocal artisans to help design its store furniture and fittings. (See Appendix 5 forpictures of Starbucks’ first store in India.) Schultz revealed:

Unlike any of the existing competitors, the stores that we will open anddesign will create a destination because of the elegance and the style ofthe store and its size. ...We want to create a coffee experience that is a

stunning experience in terms of quality. We want to create a physical

environment that does not exist, and when people see it, it will becomethe third place [third most popular place after home and work].

Starbucks flagship stores were designed to attract “20-50 year old,upwardly mobile people who had been exposed to global brands.” AvaniDavda, CEO of Tata Starbucks explained, “We want people to come toStarbucks to enjoy the experience of drinking a handcrafted, high quality


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beverage and not just to buy a cup of coffee.” Deepa Hall, director,Operations, Tata Starbucks added, “People should feel a sense of belonging at

our stores.” Accordingly, the coffee and other products were priced to achievea balance between the needs of the business and value for the customer.When the first store opened, a small cappuccino could be purchased for only

99 Indian Rupees ($1.55). Hall stated, “We were determined not to price ourproducts out of reach of Indian consumers. Hence, a family of four need payroughly 400 Rupees ($6.30) for four cups of coffee.”


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PART C – VISIONS

Starbucks Vision for India

Starbucks had big plans for India. Everyone on the management teamagreed. To achieve this goal, it planned to first build flagship stores to educatethe customer about the brand and the experience, and then expand. However,it decided to build stores only in locations where it was certain of customer

demand. It was critical that each store become profitable quickly on astandalone basis. As a rule, the plan was to build big stores with the theatre andthe ambience necessary to create the special Starbucks’ Experience.

At the same time, management was also clear that growth had to be“calibrated,” in the words of Harish Bhat. Success would be measured, “notnecessarily by store count,” commented Hall, but by “establishing ourselves asthe leader in coffee and creating the best coffee experience. Ultimately, that

speaks for itself.” Hall continued, “Our aspiration is to generate repeat, loyalcustomers. We are trying to create an emotional attachment.”

“We ultimately want to give the aspiration of a global brand to consumers in

India,” emphasized Davda. Schultz concluded, “We think over time India will beone of the largest markets in the world for Starbucks.”


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PART D – APPENDICES

Appendix 1: Global Store Count, Starbucks

Appendix 2: Financial Highlights, Starbucks (in $ millions, exceptper share data)


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Appendix 3: Revenue breakdown, Starbucks 2012

Appendix 4: Key Statistics, Tata Group’s Hotel and RetailProperties in India

Appendix 5: First Starbucks store in India


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PART E – REFERENCES

1 Starbucks, “Starbucks Opens Spectacular Flagship Store in Mumbai, Honoring the DynamicCulture of India,” press release, October 19, 2012,http://globalassets.starbucks.com/assets/0bdfb4ffac9b4721ad0e21d4d4f81df4.pdf, accessedDecember 2014.

2 Howard Schultz and Dori Jones Yang, Pour Your Heart Into It: How Starbucks Built a Company, One Cup at aTime, (Hyperion, 1997), p. 115.

3 Nancy F. Koehn, “Howard Schultz and the Starbucks Coffee Company,” HBS No. 9-801-361(Boston: Harvard Business School Publishing, 2005), p. 21.

4 Sarah Theodore, “Expanding the coffee experience: Starbucks keeps sales brewing with newproducts, innovation and global expansion,” Beverage Industry, October 01, 2002,http://www.accessmylibrary.com/article-1G1-93658732/ expanding-coffee-experience-starbucks.html, accessed June 10, 2013.

5 Rob Alkema, Mario Koster and Christopher Williams, “Resuming Internationalization atStarbucks,” 910M73, (Ontario: Ivey Publishing, 2010), p. 5

6 Richard Honack “Growing Big While Staying Small: Starbucks Harvests InternationalGrowth,” Kellogg School of Management case no. KEL447, (Kellogg School of Management,2009), via Harvard Business Publishing, http:// hbsp.harvard.edu, accessed June 2013.

7 Richard Honack “Growing Big While Staying Small: Starbucks Harvests InternationalGrowth,” Kellogg School of Management case no. KEL447, p.13. (Kellogg School ofManagement, 2009), via Harvard Business Publishing, http://hbsp.harvard.edu, accessed June

2013

8 Laurie Burkitt, “Starbucks Plays to Local Chinese Tastes,” The Wall Street Journal, November26, 2012, http:// online.wsj.com/article/SB10001424127887324784404578142931427720970.html,accessed June 10, 2013.

9 Anita Chang Beattie, “Can Starbucks Make China Love Joe?” ADAge China, November 5, 2012,http://adage.com/ china/article/china-news/can-starbucks-make-china-love-coffee/238101/,accessed June 10, 2013.

10 Shaun Rein, “Why Starbucks succeeds in China and others haven't,” USA Today, February 10,2012, http:// usatoday30.usatoday.com/money/industries/food/story/2012-02-12/cnbc-

starbucks-secrets-of-china-success/ 53040820/1, accessed June 10, 2013.

11 Laurel Wentz, “Starbucks Delves Deeply into Local Culture to Reach Chinese Consumers,” AdAge Global, September 07, 2012, http://adage.com/article/global-news/starbucks-delves-local-culture-reach-chinese/237036/, accessed June 10, 2013.

12 Max Nisen, “Starbucks Has A Brilliant Strategy For Dominating The Chinese Market,” Business Insider, Oct. 31,

2012, http:// www.businessinsider.com/starbucks-strategy-in-china-2012-10 , accessed June2013.


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13 Helen H. Wang, “Five Things Starbucks Did to Get China Right,” Forbes, August 10, 2012,http:// www.forbes.com/sites/helenwang/2012/08/10/five-things-starbucks-did-to-get-china-right/, accessed June 2013.

14 Anita Chang Beattie, “Can Starbucks Make China Love Joe?” AAge China, November 5, 2012,http://adage.com/ china/article/china-news/can-starbucks-make-china-love-coffee/238101/,accessed June 10, 2013.

15 “Starbucks Opens First Café in India,” The Wall Street Journal India Edition, October 20, 2012,http:// online.wsj.com/article/SB10000872396390444734804578066323962597316.html, accessedDecember 2012.

16 Sapna Agarwal, “We are Not Coming to India with Arrogance,” Mint, January 14, 2011,http:// www.livemint.com/Companies/wJcfMhZv0k89U9MSjkgR8O/Howard-Schultz--We-are-not-coming-to-India-with- arrogance.html, accessed January 2015.

17 “India’s coffee market competition is ferocious: Howard Schultz, Starbucks,” Economic Times,

October 25, 2012, http://articles.economictimes.indiatimes.com/2012-10-25/news/34729911_1_starbucks-howard-schultz-tatas, accessed June 10, 2013.

18 “India’s coffee market competition is ferocious: Howard Schultz, Starbucks,” Economic Times,October 25, 2012, http://articles.economictimes.indiatimes.com/2012-10-25/news/34729911_1_starbucks-howard-schultz-tatas, accessed June 10, 2013.

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